Mimi’s Cupcakes Tax Research Memorandum

Due Date: Wednesday, April 17, 2019 at 11:59 pm

Purpose: The  purpose  of  this  is  to  enable  you  to  meet  the  following  
goals:
• Understand  the  role  of  a  tax  practitioner  
• Identify  the  tax  issues  involved  in  a  scenario  
• Be  able  to  conduct  comprehensive  tax  research  utilizing  on-­‐line  tools  in  order  to  
formulate  a  solution  to  the  issues  raised.  
• Be  able  to  articulate  and  defend  a  tax  position  in  writing.  
 
Task: In  order  to  successfully  complete  this  assignment  you  must:
• Prepare  a  memorandum  to  the  tax  manager  outlining  the  information  you  found  
in  your  research.  
 
• Follow  the  examples  of  file  memoranda  can  be  found  at  the  M.  Tx.  Writing  
Website  located  at  M.  Tx.  Writing  Website.    Format  the  memo  to  include:  
o Restatement  of  Facts  (paraphrase)  
o Identify  at  least  three  main  issues  based  on  these  facts  
o Provide  a  conclusion  for  each  issue  
o Include  the  analysis  that  led  you  to  the  conclusion  for  each  issue.    This  
analysis  should  refer  to  the  primary  authority  that  best  addresses  the  
issue.      
o Primary  authority  would  include  items  such  as  the  Internal  Revenue  
Code,  Regulations,  Court  Cases,  etc.    These  also  should  be  paraphrased  in  
order  to  highlight  your  understanding  of  the  primary  authority  and  how  it  
relates  specifically  to  the  issue.  
 
• Submit  the  assignment  using  a  Turnitin  assignment  dropbox.    
o Turnitin,  is  an  online  resource  that  checks  your  work  against:  the  submissions  of  
others,  books,  articles,  tax  code,  etc.,  in  order  to  verify  originality  of  your  
content.    Given  that  everyone  in  the  course  is  working  on  the  same  problem  and  
using  the  same  format,  the  service  will  likely  find  some  similarity  in  your  
paper.    Upon  submission  you  will  be  able  to  see  your  score  immediately,  as  
others  submit  their  papers  your  score  may  increase.    Should  you  resubmit  your  
paper,  the  originality  score  will  not  be  viewable  for  12-­‐24  hours.        
o I  use  the  information  supplied  by  TurnItIn  as  well  as  my  professional  judgment  to  
determine  the  originality  of  your  paper.    
o As  a  general  rule,  however,  any  memo  receiving  a  Turnitin  score  higher  than  20-­‐25%  will  
be  considered  plagiarized  and  earn  a  grade  of  0.    I  will  accept  late  assignments  for  no  
more  than  48  hours  after  the  due  date,  with  a  20%  penalty.  
 

Page 1 of 5
 Mimi’s Cupcakes Tax Research Memorandum
Due Date: Wednesday, April 17, 2019 at 11:59 pm

The writing assignment will be graded based on grammar, style of writing, logical development of
ideas, critical thinking skills, and technical accuracy of the analysis and conclusions, using a
rubric, which is found below.

Rubric  to  be  used  for  grading  

 
  Expert   Average   Novice  
  35   32   28  
  Contains  ALL  of  the   Contains  ANY  of  the   Contains  ANY  of  the  
Content   following:   following:   following:  
-­‐All  issues  identified  and   Identified  most  of  the   Several  relevant  issues  
35  points  
thoroughly  analyzed;     relevant  issues.   not  addressed  
-­‐Conclusion  and/or   Conclusions  not   No  conclusions  offered  
recommendation   offered  for  each  issue  
offered    
  20   17   15  
  Contains  ALL  of  the   Contains  ANY  of  the   Contains  ANY  of  the  
Complete-­‐ following:   following:   following:  
-­‐Thorough  analysis     -­‐Good  Analysis  most   -­‐Did  not  research  
ness  
-­‐Proper  primary   issues  addressed     important  issues;    
20  points   authority  citation  used   -­‐Most  issues  contain   -­‐Incomplete  analysis;  -­‐
including  items  other   primary  authority  of   -­‐Primary  authority  not  
than  code  sections.   Code  Sections.   cited  
  25   22   18  
  Contains  ALL  of  the   Contains  ANY  of  the   Contains  ANY  of  the  
Readability     following:   following:   following:  
 25  points   -­‐Well  written  easy  to   -­‐Some  areas  include   -­‐Difficult  to  read  
follow  clearly  discusses   awkward  wording  or   -­‐Numerous  
issues;     phrasing;   grammatical  errors  
-­‐Followed   -­‐Grammatical  errors;  
recommended  format.   -­‐Did  not  follow  
recommended  format.  
 
   

Page 2 of 5
 Mimi’s Cupcakes Tax Research Memorandum
Due Date: Wednesday, April 17, 2019 at 11:59 pm

 
Your  business  tax  client,  Mimi  Charpentier,  operates  a  successful  sole  proprietorship  which  sells  
cupcakes  to  retail  customers  at  three  locations  in  Las  Vegas.    Mimi’s  Cupcakes  does  not  carry  
any  inventories,  because  of  the  nature  of  its  products.    Mimi  owns  the  three  small  buildings  in  
which  the  shops  exist.    One  of  the  stores  is  slightly  larger  than  the  others;  it  is  Mimi’s  original  
location,  and  it  still  is  the  site  of  the  kitchen  and  the  loading  dock  where  the  Cupcakes  trucks  
daily  pick  up  and  deliver  merchandise  and  supplies.      
 
The  work  force  of  each  store  is  the  equivalent  of  2.5  employees;  the  employees  are  paid  
reasonably  well,  and  the  low-­‐pressure  atmosphere  of  the  typical  work  day  results  in  a  very  low  
turnover  rate.    Mimi’s  offers  only  one  fringe  benefit  to  the  employees  –  it  encourages  the  
employees  to  use  Health  Savings  Accounts  for  their  medical  costs,  and  Mimi’s  reimburses  the  
employee  for  the  out-­‐of-­‐pocket  deductible  amounts,  to  a  $2,500  maximum  per  employee  per  
calendar  year.  
 
Mimi's  attorney,  Gloria  Willis,  has  urged  Mimi  to  incorporate  
the  business,  primarily  because  of  the  limited  shareholder  
liability  associated  with  corporate  status,  and  to  facilitate  a  
business  succession  plan  for  the  operation.    After  several  
years  of  discussions,  Mimi  has  agreed  to  go  ahead  with  this  
idea.    She  will  take  a  sixty  percent  ownership  interest  in  the  
common  stock  of  the  new  entity;  twenty  percent  interests  
will  be  made  available  to  Mimi’s  daughter  Nancy,  and  to  Joan  
Price,  the  chief  operating  officer  of  the  business,  who  is  not  
related  to  the  other  two  shareholders.  
 
Mimi  has  operated  the  business  as  a  cash  basis  sole  proprietorship  since  2009,  and  she  
anticipates  incorporating  the  business  on  July  1  of  the  current  year.    A  summarized  projected  
balance  sheet  for  the  business  as  of  June  30  is  attached.  
 
I  
 
Willis’  practice  consists  of  general  work  with  small  business  clients.    She  is  not  by  any  means  
conversant  with  the  federal  income  tax  rules  as  they  apply  to  individuals  and  C  corporations.    In  
this  process,  Willis  is  concentrating  on  the  establishment  of  the  new  corporate  entity,  the  
retitling  of  assets  as  they  are  transferred  from  the  proprietorship  to  the  corporation,  and  the  
mechanics  of  creating  and  issuing  shares  to  the  new  shareholders.  
 
In  your  interviews  with  the  three  shareholders,  you  discover  
that  Mimi’s  life  expectancy  is  about  two  years  from  the  date  
of  incorporation.    Nancy  recently  graduated  from  community  
college  in  restaurant  and  hospitality  management,  with  an  
emphasis  in  financial  recordkeeping.    Joan  is  about  fifty  years  
old,  in  good  health,  and  planning  to  remain  in  charge  of  
operating  decisions  for  the  three  stores  for  the  foreseeable  

Page 3 of 5
 Mimi’s Cupcakes Tax Research Memorandum
Due Date: Wednesday, April 17, 2019 at 11:59 pm

future.    Neither  Mimi  nor  Joan  projects  that  the  corporation  would  add  a  fourth  store,  nor  
would  it  expand  outside  of  Las  Vegas,  but  the  parties  review  these  issues  at  least  once  a  year.  
 
The  proprietorship  does  not  carry  any  debt;  its  trade  
payables  and  receivables  are  disposed  of  in  a  timely  
fashion.    Its  web  site  allows  for  remote  ordering,  scheduled  
pickups,  and  deliveries  of  larger  orders  to  customer  
locations.    Mimi’s  is  active  on  Twitter  and  Facebook,  where  
the  company  has  about  five  thousand  friends.    This  
presence  allows  Mimi’s  to  plan  and  carry  out  
“spontaneous”  outdoor  events  on  the  stores’  patios,  where  
high-­‐markup  products  are  made  available  in  plentiful  
quantities.  
 
As  Mimi  has  told  you  several  times,  “this  is  a  simple  business,  and  we  know  how  to  keep  our  
customers  happy  and  coming  back  on  a  regular  basis.    I  do  not  want  the  legal  etc.  aspects  of  an  
incorporation  to  disrupt  the  good  thing  that  we  have  here.”    But,  in  your  dealings  with  Mimi  
over  the  years  concerning  her  Forms  1040  and  employment  tax  obligations,  you  know  that  she  
expects  you  to  give  her  suggestions  about  how  her  tax  liabilities  would  be  affected  by  decisions  
that  she  makes,  and  that  she  expects  to  “get  it  right  the  first  time”  when  she  makes  her  choices.  
 
At  Mimi’s  latest  appointment  with  her  cardiologist,  Cathy  Duvall  MD  mentioned  that  her  own  
clinic  was  about  to  incorporate,  but  that  Duvall  would  retain  her  individual  ownership  of  the  
clinic’s  land  and  building.    Duvall  was  certain  that  there  were  tax  and  legal  advantages  to  
structuring  the  corporation  that  way,  but  she  could  not  really  explain  to  Mimi  what  those  
advantages  were.  
 
Required:  
 
You  will  be  meeting  shortly  with  Mimi,  Nancy,  and  Joan  to  discuss  the  tax  aspects  of  the  
incorporation,  be  sure  to  review  the  various  options  available  for  operating  the  business  and  the  
tax  consequences  of  these  options.  
 
Mimi  certainly  will  ask  you  to  cover  the  issue  of  which  assets  to  contribute  to  the  new  
corporation,  with  the  explanations  that  Duvall  could  not  provide.    Concentrate  on  those  issues  
for  this  meeting,  offering  at  least  two  alternative  plans  for  the  asset  transfers.  
 
At  the  meeting,  Nancy  will  look  to  you  for  information  on  issues  of  asset  basis,  as  well  as  any  
effects  that  the  incorporation  might  have  on  sales/use  and  self-­‐employment  tax  obligations.    
Ignore  any  exposure  to  the  corporate  or  individual  alternative  minimum  tax,  though.  
 
The  “elephant  in  the  room”  will  be  the  issue  of  Mimi’s  continued  involvement  in  the  business.    
You  should  be  prepared  with  some  initial  suggestions  as  to  business  succession  planning,  and  
the  later  transferability  of  the  shares  in  Mimi’s  Cupcakes  Inc.  
   

Page 4 of 5
 Mimi’s Cupcakes Tax Research Memorandum
Due Date: Wednesday, April 17, 2019 at 11:59 pm

 
 
Projected  Balance  Sheet  ($K)  
Mimi  Charpentier,  dba  Mimi’s  Cupcakes  
June  30  
 

Original   Fair  Market  

Tax  Basis
Cost Value

Cash 10 10 10
Displays,  furniture 30 20 20
Office  equipment,  financial  records 5 0 5
Trucks 80 25 35
Land,  buildings 950 490 685
Mimi's  recipe  database 0 0 60
 

Page 5 of 5